Last year was definitely rough for Exxon Mobil (NYSE:XOM), with the shares down about 24% from the high Exxon stock was the sixth worst performer in the Dow.
But the drop in XOM was more than just about the market swoon. The oil industry has had to deal with some tough headwinds, such as the volatility of crude prices and a stronger dollar. The result is that there has been drops in many oil companies like Chevron (NYSE:CVX), Royal Dutch Shell (NYSE:RDS.A, NYSE:RDS.B) and Marathon Oil (NYSE:MRO).
Despite all this, might there be an opportunity, such as with Exxon stock? Well, I think so. The valuation on the stock is attractive and so is the dividend.
So let’s take a deeper look:
XOM Stock: Integrated Model
Over the years, various energy companies have pulled off major restructures. Often this has meant spinning off assets to focus on certain market segments.
But Exxon has taken a different approach. That is, the company remains a highly integrated platform, with upstream (oil exploration, extraction and production) and downstream (marketing, refining and retail) assets. There is also a major chemicals business, which posted $3.2 billion in profits during the past nine months.
According to Exxon executive Neil Hansen on the last earnings call: “The long-term demand fundamentals remain strong in the Chemical business.”
For the most part, the integrated model allows for much stability in the overall business. This can certainly be key as energy commodities are susceptible to major swings in prices (which was the case for crude oil during the past six months or so).
XOM Stock: Investment and Production
One of the nagging issues for Exxon stock has been the languishing oil-equivalent production. For example, during the latest quarter there was a 2% decline to 3.8 million barrels per day. Then again, when excluding entitlement factors and divestments, the liquids production was up 6%.
Yet Exxon has been investing aggressively in production, and this should lead to better growth in the years ahead. The unconventional production in the Permian has been impressive. There are currently 38 rigs in the Midland and Delaware basins.
Meanwhile, Exxon has the benefit of global scale. In the latest quarter, the company had its ninth offshore discovery in Guyana. There has also been an increase in the holdings of pre-salt basins in Brazil as well as the initiation of production in the offshore Kaombo project in Angola.
It’s also important to keep in mind that Exxon has a strong focus on innovation, which is critical for production. The company spends over $1 billion annually on Research & Development and has more than 19,000 scientists and engineers. As a result, Exxon has been able to create innovations in areas like seismic imaging and modeling.
XOM Stock: Valuation and Dividend
Exxon is a highly efficient organization that generates substantial profits. In Q3, earnings soared by 57% to $6.24 billion.
As a result, Exxon has been a solid dividend payer, with the current yield at 4.6%. Consider that the company has increased the payout an average of 6.2% annually for the past 36 years. In other words, Exxon stock is a pretty good bet when it comes to the dividend.
The debt levels are also reasonable, at about $40 billion. During the latest quarter, the company reduced it by about $1.2 billion. The debt is actually at the lowest level since 2015.
And finally, Exxon stock price is fairly cheap, with the price-to-earnings ratio at about 13X. What’s more, Wall Street analysts think XOM stock looks attractive. The average price target is $84, which assumes 18% potential upside from current levels.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.